Question

A condensed income statement for Gilbert, Inc. follows: (amounts are shown in thousands) Products F G H Total Sales (total) $ 285 $ 188.5 $ 405 $ 878.5 Total Unit-level Costs (154 ) (161.7 ) (217 ) (532.7 ) Contribution Margin 131 26.8 188 345.8 Company-wide Facility-Level Costs (26.7 ) (31.7 ) (57 ) (115.4 ) Income (Loss) $ 104.3 $ (4.9 ) $ 131 $ 230.4 Gilbert's management is considering whether to eliminate manufacturing product G at the beginning of the next year. The elimination will have no effect on the sales or unit-level costs of products F and H. The change in income that would result from eliminating product G is

Answer 1

Gilbert, Inc.

The change in income that would result from eliminating product G is:

= $26,800.

Step-by-step explanation:

a) Data and Calculations:

Products F G H Total

Total Sales (total) $ 285 $ 188.5 $ 405 $ 878.5

Total Unit-level Costs (154 ) (161.7 ) (217 ) (532.7 )

Contribution Margin 131 26.8 188 345.8

Company-wide Facility-Level Costs (26.7 ) (31.7 ) (57 ) (115.4 )

Income (Loss) $ 104.3 $ (4.9 ) $ 131 $ 230.4

b) The company-wide income will reduce from $230.4 to $203.6 (a difference of $26.8) as a result of the Contribution Margin of product G that will also be eliminated. Note that product G's facility-level cost of $31.7 cannot be eliminated.

In other words, the company-wide total income will be $203.6 ($319 - $115.4). This proves that product G should not be eliminated. It was actually contributing to the fixed expenses. However, the company-wide facility costs should be analyzed further to determine how much can be attributed to product G before a final decision is reached.